Divorce Protection Trust in your Will – stop your child’s ex-spouse taking your money when you die
Your daughter-in-law knows you have money and that you are old. She tolerates living with your son a little longer. You die. She immediately leaves your son. She asks the Family Court for half of your son’s inheritance.
When you build your tax-effective Wills on our website the trusts available in your Wills include:
- 3-Generation Testamentary Trusts – to reduce Capital Gain Tax, Transfer duty (stamp duty) and income tax
- Superannuation Testamentary Trusts – remove the 15% or 30% (plus Medicare) tax on your Superannuation when your Superannuation goes to adult children
- Protective and Maintenance Trusts – in case your children, grandchildren or a beneficiary are under the Age of Majority
- Bankruptcy Trusts – in case a beneficiary goes bankrupt
- Divorce Protection Trusts – in case a beneficiary suffers from a split up from a spouse or defacto partner
How does the Divorce Protection Trust work in my Will?
The Divorce Protection Trust seeks to delay or stop any capital or income going to the beneficiary who is suffering divorce or separation proceedings. It reduces the opportunity for the Family Court to get its hands on your money.
The Family Law Act gives the Family Court power over third parties. See the Federal Court case in the West Point collapse.
In a divorce, the Family Court looks at how the assets came into the trust. It considers who gave the money to the trust in the first place.
1. If assets come from one of the couple during the relationship and are then put into a trust, the assets are considered part of the marriage. The Court is free to order that the assets in the trust be transferred to your in-law.
2. However, this may not apply where the money comes via a Will. Instead of your divorcing child putting money into a trust, it is you who is putting the money into the trust (via a Divorce Protection Trust). It is arguably different where the married person’s parents gift their assets into a Divorce Protection Trust.
Trusts set up to limit the reach of the Family Court can be disregarded by the Family Court as a sham. However, that relates predominantly to where one of the separating couple has taken their money and tried to hide it in a trust. This is not the case here. This money is not from one of the separating couple. Rather, the money is from a parent of one of the separating couple. The money is from an inheritance of a parent, grandparent or great grandparent. The Divorce Protection Trust is designed so that the inheritance never becomes an asset of the marriage. It is designed to be a trust for the benefit of many beneficiaries not just the separating person.
When does the Divorce Protection Trust operate?
The Divorce Protection Trust sits dormant in the Will until needed. The Divorce Protection Trust activates for the benefit of the married person and that person’s children and grandchildren. (This is your divorcing child, then their children and their grandchildren). The assets in the Divorce Protection Trust is provided by the parents (being you), not the married person (e.g. your child). There is higher protection from the Family Court.
Your descendants (children, grandchildren and great-grandchildren) are beneficiaries of the Divorce Protection Trust but not owners of the assets.
What if a descendant controls the trust? This is where the descendant is the sole trustee or appointor. (This position of power controls the trust.) The Family Court states that the ‘controller’ is also the ‘owner’.
In these circumstances, a court may decide that it has the power to make an order affecting assets held by the trust. For example, the Court orders the transfer of the trust assets to the former spouse of the controller or to a trustee in bankruptcy.
However, the Divorce Protection Trust removes that person’s power to control the trust while they are suffering the separation. This removes control.
Who is the new Trustee of the Divorce Protection Trust?
The Primary Beneficiary under attack is automatically removed from all positions of power for their testamentary trusts. This includes the Appointor and Trustee positions. The power passes to the other executors named in the dead person’s Will – or their next of kin if they are also dead – or if there are none then blood relatives of the Primary Beneficiary. Of course, the Primary Beneficiary can always amend the Divorce Protection Trust to change this.
For example, widower Dad has 3 children. He leaves them everything and makes them the executors. Dad dies leaving 33 1/3% of the assets to his son Gavin. Ten years after dad dies Gavin separates from his hot trophy wife. Immediately his two other siblings are automatically in control of all his testamentary trusts that Gavin got from his Dad. However, one is dead and their children take on the job. They must act only in Gavin and his children’s best interests. So the siblings and their children can’t benefit themselves from the trust.
The Divorce Protection Trust benefits the current and succeeding generations. It not only protects your children. It also protects your grandchildren and grandchildren, for up to 80 years after you die. This helps protect the assets from the Family Court.
For help building your tax-effective Wills on our law firm please telephone us.
Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
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